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Friday, April 27, 2012

I was reading a thoughtful blog post from Warren Mosler and when I came across one of his responses it reminded me that there is still significant work that needs to be done to connect MMT work with Steve Keen and the circuitist works that tend to focus on the interactions of banks and individuals in credit and debt formation.

This raises an interesting question:
Is it ‘better’, for example, to facilitate the increase in spending through a private sector credit expansion, or through a tax cut that allows private sector spending to increase via increased income, or through a government spending increase?

The answer is entirely political. The output gap can be closed with any/some/all of those options.

Is it really entirely political from Keen's perspective? In one circumstance, say a tax cut, there is no additional private debt added, whereas in the other case of private credit expansion there is necessarily a private debt increase. I would imagine from that perspective, the latter may pose more of a problem - beyond the politics in so far as it may facilitate an unsustainable debt bubble.

Perhaps the options would mainly be political in an ideal MMT world where policy makers acted as if MMT explained reality, but in the environment we presently live in, I would suggest when given the choice to facilitate recovery between increasing private debt levels or increasing public 'debt' levels, the safest course of action would want to choose the latter.

If one accepts this logic, and admittedly some may not, it shines the light on the ineptitude of current monetary policy and lack of present fiscal policy gumption.

While I don't necessarily think this is the most effective way to get money into the hands of Hoosiers, I'm really wondering what the environmentalist side of the Democratic party are going to think about this. Just a few years ago there was a debate nationally about whether or not to increase gas taxes as a disincentive to CO2 emissions. Many economists and environmentalists jumped on board with the idea (though I did not).

Price bubbles, by their very definition, are about prices that reach unsustainable heights. This means, when they fall, they don't get back to those heights unless one of 2 things happen: 1. another bubble forms, or 2. natural long-term appreciation reaches that level.

I don't know of anyone expecting another housing bubble anytime soon, and I think it would be ridiculous to assume the housing prices should be - if accurately priced - at the levels they were in 2006. Here's a nice graph from Robert Shiller (of the Shiller Price Index). Does the top of that red line look like something we are going to get back to anytime soon? No, it doesn't.

Economists all say the same thing - we aren't even at the bottom yet - there's still too much housing inventory to put much of a dent in price valuations now. The next logical statement though is equally important - even when we get past the bottom, our next top is not going to be anywhere near where it was in 2006.

Monday, April 2, 2012

If a nine year old thinks that they are right, they will yell and scream as such and will tend to tune out what other kids have to say to the contrary.

In some sense this is human nature. Once we make an argument part of our core being, it's difficult to let something new in to challenge it. I've done this to some degree in the past - we all do. But we like to think that eventually, adults have this ability to let their guard down. It's called learning.

I posted on Krugman's post, but since he may not approve it, I'll just state the obvious. He, Fullwiler, and Keen need to meet for a few days, have some beers, maybe watch "A Beautiful Mind" on Netflix to get in the mood. Then, have a nice deep discussion about each others' assumptions - actively listen to each other, instead of taking cheap pot-shots.

I teach part time but I'm a full time real world employee - we can't afford all this childish banter in the real world. And frankly, economics as a profession, its students, and the policy-makers that listen to economics deserve better. This same kind of behavior reared its head when I worked as an economist at the Volpe Center though - I really do think economists have stunted social skills.

I'm not saying economists can or should agree about everything, but Jesus Christ, monetary theory is a big important topic. Economists need to at least agree on the basic mechanics of the financial system. I teach 2 weeks of it in my macro course. Right now, I have to teach it two ways: the mainstream way, and then teach it the heterodox way. This is not my fault that I have to do this. This is the fault of the profession - and it's sheer laziness and childishness.

Krugman is airing his internal struggles with understanding the monetary system for the world to see.

He responds to Fullwiler's blog post: here, and then decides he's not done digging , here.

What I find fascinating is his apparent own admission (and seemingly contradictory from earlier statements) that he believes the endogenous theory is correct. He admits the following, even if he only admits it over a period of 6 week stretches:

"the central bank will always supply as much monetary base as the markets demand, at a fixed interest rate."

Unfortunately, his quote above is a bit of a mi-characterization of what someone like Steve Keen would say and is not wholly accurate since the central bank doesn't supply base necessarily at a 'fixed' rate...but they do supply it insofar as it is inline with their target rate of interest.

The other thing I find fascinating about Krugman's new posts is the way he draws the money market model:
Here's the new Krugman:

and here's the old Krugman from his economics textbook "Economics, 2e":

So I guess the new Krugman is a bit more uncertain about the money supply. I guess he concedes that increases in some fixed, federally set, money supply don't 'cause' interest rates to fall, after all. Maybe he should update his textbook then.

He would argue today though that there is no difference between assuming the Fed sets the interest rate and assuming the Fed set money supply. The problem is, there is a difference. It's not just 'management technique' ---Krugman imagines far more power of controlling the economy at the Fed than exists, when in reality the power is in the hands of the market. The Fed, whether they meet every 6 weeks or every year or whatever to set major policy, they can change their target interest rate and that may in fact have some moderate affect on the willingness to borrow (no one is disputing the demand curve), but the Fed's limited control on short-term interest rates do not an entire economy make. There are many reasons to lend and borrow other than interest rates: expected future profits, expected future inflation, business and consumer confidence, speculation, etc. Bubbles don't need low interest rates, in and of themselves, to form. The Fed can't easily control those things just as they can't control the markup over short-term interest rates that lenders/borrowers decide in aggregate.

In some way, this obsession with simple supply/demand diagrams is partly to blame. By including only one factor that can affect lending/borrowing decisions (interest rates), it obscures the bigger picture.

Garth Brazelton

About Me

I work for the Indiana Economic Development Corporation as the Director of Operations and Business Systems, and I teach macroeconomics at Indiana University (Indianapolis). Previously, I was an Economist at the US DOT in Cambridge, MA. This blog does not represent the opinions of any of these organizations.